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Futures Option Trading Strategy Idea
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Futures Option Trading Strategy Idea

  #1 (permalink)
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Futures Option Trading Strategy Idea

I was contemplating selling a short strangle on a mostly non-volatile commodity like corn, but wanted to avoid the worst case scenario of it moving against me too far on one side. Here is my idea.

What if I sell a strangle, and as it becomes obvious the trend is shifting to the upside and/or it becomes ITM, I buy a long futures contract. The idea being that I would defend either the top or bottom of the strangle based on technical analysis, etc. The benefit of this is that the premium received from both the call and put would give some leeway to be right about the direction.

The disadvantage of course is if it reverses when you are long a contract, but you still have more leeway to be right because of the premium. So this isn't a hedge but a way to collect the massive premium of a strangle while using a futures contract to defend the worst case scenario of it moving too far against you and you lose all the premium you received. So either leg becomes a protected call or put based on what the asset is doing over the months of the contract.

I supposed one can imagine it like ping pong, and one is merely defending the side that is breached and possibly selling more on the opposite side. And one can use a 1 to 3 or 1 to 2 contract to option ratio for defending. This buys more time for the asset to reverse and time decay to work its magic. I would be interested in everyone's thoughts on this.

Really I was just trying to think of a way to sell naked options while being able to protect it ONLY if needed(instead of defaulting to a spread).


Thanks a ton.

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  #3 (permalink)
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mathius777 View Post
I was contemplating selling a short strangle on a mostly non-volatile commodity like corn, but wanted to avoid the worst case scenario of it moving against me too far on one side. Here is my idea.

What if I sell a strangle, and as it becomes obvious the trend is shifting to the upside and/or it becomes ITM, I buy a long futures contract. The idea being that I would defend either the top or bottom of the strangle based on technical analysis, etc. The benefit of this is that the premium received from both the call and put would give some leeway to be right about the direction.

The disadvantage of course is if it reverses when you are long a contract, but you still have more leeway to be right because of the premium. So this isn't a hedge but a way to collect the massive premium of a strangle while using a futures contract to defend the worst case scenario of it moving too far against you and you lose all the premium you received. So either leg becomes a protected call or put based on what the asset is doing over the months of the contract.

I supposed one can imagine it like ping pong, and one is merely defending the side that is breached and possibly selling more on the opposite side. And one can use a 1 to 3 or 1 to 2 contract to option ratio for defending. This buys more time for the asset to reverse and time decay to work its magic. I would be interested in everyone's thoughts on this.

Really I was just trying to think of a way to sell naked options while being able to protect it ONLY if needed(instead of defaulting to a spread).


Thanks a ton.

In my opinion the risk of making severe losses in a volatile market is significant. You might be stopped in and out again and again in your future contract. I prefer selling the options and buying them back when my stop price is reached. Do not forget: USDA will publish a report on 12th of January. January reports are wel known for their surprises and, thus, large price movements.

Best regards, Myrrdin

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